- Economic uncertainty associated with an unprecedented presidential election cycle will continue after new administration moves in due to ongoing discontent between parties.
- U.S. energy sector has likely bottomed out; real signs of recovery have emerged over the past quarter, such as increases in rig counts.
- Gross domestic product (GDP) is anticipated to be 1.4% for 2016 and 2.0% for 2017, both slower than 2.5% in 2015.
- U.S. employment remains steady, posting 156,000 new jobs in September, after 167,000 in August. Job growth below 200,000 per month suggests tightening labor market.
- The Austin metropolitan area’s GDP grew 5.9% from 2014 to 2015, the second fastest growing city in Texas, just behind San Antonio.
- Austin’s economy remains among the strongest in the state of Texas.
- Net absorption was 316,658 sq. ft. in Q3 2016, a demand for office space that is within Austin’s historic Q3 performance despite a decrease of -80.7% YoY.
- Leasing activity of 1,279,093 sq. ft. was within its historic Q3 performance.
- Vacancy remained unchanged, while availability declined to 13%.
- 326,000 sq. ft. of deliveries occurred in Q3 2016, leaving 2.1 million sq. ft. under construction.
- Austin’s office market continues to push forward with a balanced supply and demand of office space.
Every facet of the Austin market continues to stay hot, and it seems like everybody wants to be a Texan these days. Austin continues to be listed among the fastest-growing cities of Texas. Additionally, Fortune Magazine recently detailed why Austin is “the rock star of small-business cities.” The vast amount of movement in Austin’s marketplace may make it difficult to recognize the city’s skyline if you have not seen it in the past few years.
Companies are moving to the Austin metro area in droves, and new, locally based start-ups are consistently receiving substantial funding. Fresh, out-of-the-box ideas and the abundance of Austin’s workforce talent make the city’s appeal that much greater to investors. Technology start-ups have burst into a wide variety of industries, including those that previously had limited influence from the technology sector, such as public transportation, real estate, health, nutrition, food delivery, and dating. The changes in these industries have been impactful, to say the least, and their effects can be seen throughout our daily lives. However, in order to make progress in anything, you must first embrace change, and Austin’s tech-friendly culture has helped make these advancements possible.
As a result of abundant seed and Series A funding, increased real estate activity and competition in the marketplace, Austin now ranks as one of the nation’s most desirable places to live and work. This recognition has greatly affected vacancy and lease rates. According to the Austin Business Journal, “The cost to lease in Austin’s premium properties now surpasses comparable space in major markets such as Chicago, Seattle, Los Angeles and Miami” and “is now the No. 7 most expensive skyline market.”
NAI Partners | Austin
With a truly unprecedented election cycle and associated economic uncertainty coming closer to an end, discontent between parties will still likely hang over policy and decision makers as a new administration takes hold. Gross domestic product (GDP) is anticipated to be 1.4% for 2016 and 2.0% for 2017, both slower than 2.5% in 2015. GDP is being led by consumer spending and job gains, but weak business, government spending, and slow export sales are holding it back. Consumer spending increased strongly by 4.3% in Q2. Revolving consumer credit continued its slow but steady increase, with August showing the largest increase in 2016. Consumer interest rates remained steady. The Consumer Sentiment index moved higher in September, rising 1.4 points to 91.2, most of which came from higher income households.
Employment continues to remain steady. September posted a solid 156,000 new jobs, following 167,000 new jobs in August. Job growth remaining below 200,000 per month is suggestive of a tightening labor market. As more people entered the labor force, unemployment moved up to 5%, which historically has been considered full employment in the labor force. Also, wage growth increased by 2.6% in September, following 2.4% in August. Some analyses still suggest that the recovery is weak and as a result interest rates may stay low. With strong September job growth, and two more job reports to go, the December FOMC meeting following the election will likely result in an interest rate hike by year’s end. Nevertheless, interest rates are expected to remain low and fluctuate within a small range.
International trade continues to see slow export sales. U.S. exports are down 3.7% YoY. Yet, the negative economic impacts of falling import prices is beginning to fade, as import prices inched up 0.1% in September and are only down 1.1% relative to this time last year. The trade deficit widened modestly in August, but realized net exports are likely to make a positive contribution to GDP in Q3. Demand for U.S.-made durable goods abroad will remain weak and flat through the end of the year and increase modestly by 3-4% in 2017. These trends may stifle U.S. business investment.
The Small Business Optimism Index of the National Federation of Independent Businesses (NFIB) continued its decrease over the past 12-18 months, declining 0.3% points in September to 94.1, but remaining unchanged relative to the past six-month average. This indicates businesses are cautious on hiring and inventories. While factory orders of durable and nondurable goods rose in Q3, business investment in capital goods fell, which signaled a softer quarter. In September the ISM manufacturing index bounced firmly back into expansion territory at 51.5.
The U.S. energy sector appears to have bottomed out, and over the past quarter or so has begun to show real signs of recovery, with consistent weekly increases in rig counts being led by the Permian Basin. Nevertheless, modest increases in drilling activity and oil production does not signal the end of the persistent oversupply and large stockpiles. Recently, the Organization of the Petroleum Exporting Countries (OPEC) has agreed to agree to cut production at the next OPEC meeting, but when it still remains unclear when the global rebalance of the oil market will occur.
More people are looking to buy homes, but home availability remains low, driving up prices. Residential housing for August, in terms of sales of both new and existing homes fell, and new housing starts declined as well. Yet, this is in the context of a strong first half of 2016 where home sales and new home construction were very strong through July 2016. The Dodge Momentum Index of non-residential construction declined 4.3 percent in September to 129, but is up 5.1% YoY. Both July and August saw pullbacks in total construction momentum across residential, nonresidential, and public spending.
The Austin metropolitan area’s GDP grew 5.0% from 2014 to 2015, making it the second fastest growing city in Texas just behind San Antonio. Texas continues to have a mixed set of economic numbers in 2016, but all indications are that the bottom has come and we are now moving up. Rig count has increased every week for 15 of the past 16 weeks. While Houston technically did move into an economic recession in November of 2015, Austin remains stronger. Employment in Texas grew 2.6% in August and 3.2% in July, with an annualized increase of 0.8% for 2016 thus far. The employment forecast for Texas is 1.2% in 2016. Jobs in Austin grew at a 3% annualized rate for the three months ending in August. Job growth was broad based, with the exception of manufacturing and health and private education services. Unemployment was 4.7% in Texas.
The revenue index of the Texas Service Sector Outlook survey increased from 6.5 to 13.0 in September. Meanwhile the sales index of the Texas Retail Outlook Survey increased from -5.3 to 2.0. Factory activity in Texas did increase substantially in September, according to the Texas Manufacturing Outlook Survey. The index which measures manufacturing conditions rose 12 points to 16.7, again a substantial increase. Nevertheless, consistent with the broader U.S. economy, business conditions in Texas are mixed. The general business activity index continued into negative territory for another month at -3.7, representing almost two years in negative territory. The Austin Business Cycle Index decreased a bit to 3.0% annualized in August 2016, down from 5.5% in early 2016 and 10.2% in 2014.
Demand, as measured by net absorption (direct plus sublease space), is the change in occupied stock inventory. Figure 2 shows net absorption since 2004 by year and quarter for combined Class A and B office space. The third quarter of 2016 posted 316,658 sq. ft. of positive net absorption, representing a 22% increase QoQ but a -81% decrease YoY (Table 1). The historic Q3 average (± 95% confidence interval) for net absorption is 555,277 sq. ft. (± 285,808). We are 95% certain that Q3 net absorption typically falls between 269,469 sq. ft. and 841,085 sq. ft. Thus, net absorption for Q3 was still within its historic Q3 performance, despite the substantial YoY decline.
Leasing activity is another measure for the demand of office space, representing the total amount of space for direct leases, subleases, renewals, and pre-leasing. Figure 3 shows leasing activity since 2004 by year and quarter for combined Class A and B office space. Leasing activity of 1.2 million sq. ft. occurred in Q3 2016, marking decreases of -17.9% QoQ and -48.5% YoY (Table 1). The historic Q3 average (± 95% confidence interval) for leasing activity is 1,736,466 sq. ft. (± 385,560). We are 95% certain that Q3 leasing activity typically falls between 1,350,906 sq. ft. and 2,122,026 sq. ft. This indicates that leasing activity is within historic Q3 performance.
Vacancy and availability measure the supply of office space, and as such are key indicators of shifts in the phase of the office market cycle. Availability better measures total supply because it includes vacant, occupied, and sublease space. Vacancy better measures empty space in the market, whether or not that space is leased or for rent. For Class A and B buildings combined, availability was 13%, a decrease of -3% QoQ and YoY (Table 1). Vacancy was 9.1%, with no change QoQ or YoY (Table 1). Over the longer term, availability has been hovering between 13% to 14% since late 2012. Meanwhile, vacancy has steadily declined from 12% to 9% (Figure 4).
Figure 5 plots both gross and base (NNN) asking rents for direct and sublease space since 2004 for Class A and B buildings. Despite limitations of asking (rather than actual) rent, we can derive information on market conditions by examining the difference between direct and sublease base rents. Negative differences between direct and sublease asking rents indicate a strong, tight market in which sublease space is getting equal to or greater rents than direct space. Positive differences between direct and sublease asking rents can indicate a softening market if the slope of the QoQ sublet rent is negative. In such cases, market conditions are softer the greater the difference. However, if the slope is positive or flat alongside increasing direct rents, then business expansion and a strong market are occurring.
The difference between direct and sublease base asking rents for Class A buildings has decreased from $1.56 to $5.70 since 2013 (Figure 5B). Historically, Class A buildings have shown an average difference of $1.21 between direct and sublease base asking rents, with a 95% confidence interval of $0.71 to $1.72. At the current $5.70, Class A rents are outside this expected range, but the slope of sublet rents QoQ are flat to positive since 2013, indicating business expansion and a strong office market.
Historically, Class B buildings have shown an average of $-0.40 difference between direct and sublease base asking rents, with a 95% confidence interval of $-79 to $0.05. At the current $-0.40 difference, Class B rents are outside of this range, and negative, indicating a strong Class B market in which subleases are getting higher rents than direct spaces, likely due to limited supply.
Construction of new stock inventory shapes the supply of office space. “RBA Delivered” refers to completed construction, while “RBA Under Construction” refers to space under construction that has not yet been completed. Deliveries in Q3 2016 were 326,204 sq. ft. of Class A and B buildings, an increase of 47.5% QoQ but a decrease of -71.6% YoY (Table 1). RBA under construction was 2.1 million sq. ft. in Q3 2016, a decrease of about -5% QoQ and YoY (Table 1). Figure 6 breaks down deliveries and construction on an annual basis by Class A and Class B products.
Figure 7 depicts changes in the inventory of Class A and Class B buildings since 2004, both in terms of RBA and the number of buildings. Stock inventory for Class A and B office space included 76 million sq. ft. for 2,042 buildings, an increase of 1.7% YoY (Table 1).
The quarterly report for the office market includes information and data for Class A and Class B buildings, but excludes Class C buildings. Buildings are not excluded on the basis of single vs. multi-tenancy, owner occupancy, or building size.
Information and data within this report were obtained from sources deemed to be reliable. No warranty or representation is made to guarantee its accuracy. Sources include: U.S. Bureau of Economic Analysis, CoStar, Council on Foreign Relations, Federal Reserve Bank of Dallas, Greater Houston Partnership, FiveThirtyEight.com, Houston Association of Realtors, Moody Analytics, NAI Global, National Association Realtors, Texas A&M Real Estate Center, Well’s Fargo, University of Houston’s Institute of Regional Forecasting, U.S. Bureau of Labor Statistics.